Beef cows vs. gold: Identifying the better investment

Nearly a decade ago, my brother, Phil, told me to buy gold. “Tom,” he said in his naturally confident demeanor, “you need to own gold right now. It’s going to go a lot higher.” Boy, do wish I had listened. Gold prices have skyrocketed. Anyone with gold in their investment portfolio has enjoyed outstanding returns. Gold prices have increased more than 400 percent since 2005. The run-up may not be over either. Gold is considered a “safe haven” investment, because it has both intrinsic value and a global demand base. Worried about inflation? Buy gold. Concerned that the U.S. Government has too much debt and keeps printing money too fast? Buying gold could be the solution. China appears committed to this thought process. The Chinese government has been actively buying and accumulating physical gold at an aggressive pace for several years now. While their appetite for owning more U.S. debt wanes, their demand for gold is on the rise.

If all that sounds like an advertisement from you local precious metals dealer…it actually is not.

I believe there is a better investment that will easily outpace gold during the next several years: Beef cows.”

Those female bovines out foraging in your pasture could well be one of the hottest investments on the face of planet earth. Why? Two reasons:

1. They produce exceedingly valuable calves.

2. Their own asset value has yet to appreciate very much.

Note in the accompanying chart a comparison between the indexed-value of gold and the same for beef cows (average January-February indexed prices are shown for each year). Starting in 2005, gold has seen steady appreciation, rising almost every year. The past several years in particular have seen rapid price gains. Gold prices have literally doubled since 2009.

In contrast, beef cow values have increased only 23 percent since 2005. So you can buy gold at more than four times the price it sold for 7 years ago, or you could buy cows at a much lower relative value. Interestingly, the average price of a 550-lb. steer calf rose 44 percent during this same time period, which amounted to an increase of more than $250 per head. Drought in the South Central Plains and higher feed costs virtually everywhere in the country have undoubtedly held bred cow values back. But calf prices are now high enough to offer excellent profit opportunities, even with higher cow-carrying costs.

In my opinion, efficient cow-calf producers will see returns over cash costs of $300 to $500 per cow during the next several years. Some are already experiencing returns of that magnitude. Selling calves for around $1,000 per head will put significant profit in producer pockets, and that will make the factory (beef cows) a more valuable asset, which sooner or later, will become fully factored in the price of bred cows.

Rain in the right areas this spring and summer could dramatically lower forage costs, which would also help beef-cow values appreciate further. Yet another supporting factor is the value of cull cows. Recent slaughter cow prices traded solidly in the $80s per hundredweight, which is a new record high. A 1,300-pound cull cow is therefore worth more than $1,100, and I continue to hear stories of heavier cows bringing as much at $1,400 or even $1,500 per head. That is a strong underlying force that should provide significant support to the bred cow market in the years ahead as cow slaughter drops and cull cow prices move even higher.

Bottom Line: As long as you have a competitive cost structure and are producing marketable calves, this is a great time to be in the cow-calf business. Profits are improving and the value of beef females is almost guaranteed to appreciate rapidly as we move toward the middle of the decade. The deck is truly stacked in favor of rising cow values. You can buy gold, and it will probably turn out to be a good investment. As for me, I will be looking to own more beef cows. Might just call Phil to see if he wants to partner on some.